Homebuilder ETFs: Accurate Predictors of Slack Data

ETF Trends

Data points are lagging indicators while equity markets are supposed to be forward-looking indicators. It is just one example, but homebuilder exchange traded funds recently proved their worth as forward-looking indicators.

On Monday, the pending home sales index slipped 5.6% and 1.2% on a year-over- year basis with the key Northeast and Western markets showing the worst declines at 9.6% and 9%, respectively.

Year-to-date, the SPDR S&P Homebuilders ETF (XHB) is up 18.2% while the rival iShares U.S. Home Construction ETF (ITB) is higher by 10.8%, but as Trang Ho reports for Investor’s Business Daily, both ETFs have been unable to reclaim their 52-week highs set in May.

Since May 22, the day speculation of Federal Reserve tapering started soaring, XHB and ITB have traded lower. Although XHB is off less than 1% since then, ITB has plunged 7.4% That is a potentially ominous sign for the residential construction market because ITB is more exposed to homebuilders than is XHB. [Homebuilder ETFs Under Pressure]

Eight of ITB’s top-10 holdings, a group that represents 63% of the ETF’s weight, are homebuilders. By comparison, XHB’s combined weight to home furnishings, home retailers, hardware stores and appliance makers is about 46%. That means XHB is a quasi-consumer discretionary ETF and discretionary has been one the leading sectors as U.S. stocks have soared over the past few years. [Homebuilder ETFs Still a Far Cry From Old Highs]

After Treasury yields spiked, sending mortgage rates higher in the process, housing affordability is now at a five-year low and scarcity of distressed sales makes it harder for prospective buyers to find deals, according to IBD.

XHB’s heavier bias to discretionary names could help whether a moderate housing market slump, which is to say if such a slump does come to pass, XHB would likely be less bad than ITB.

ITB currently resides 10.5% below its 52-week high while XHB is 4% below that level. The two have the ominous distinction of being among a small number of ETFs that are still nowhere close to their pre-financial crisis highs. XHB would need to rise almost 48% to reclaim its all-time high set in 2006 while ITB would need to almost double.

SPDR S&P Homebuilders ETF

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Tom Lydon’s clients own shares of XHB.

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